Keeping Good Records for Tax Compliance

One of the most common non-tax questions I get is “How long should I keep this?” ‘This’ could mean bank records, copies of tax returns, or virtually any other piece of business information. 

Here are some best practices for keeping business records for tax compliance. Specifically, what to keep and how long to keep it in case a taxing authority ever decides to examine (audit) a business return. 


Obviously, keeping good books and records is ‘just good business,’ but why? The answer to that isn’t as simple as “in case you are audited.” The answer is often evident when a business owner needs to substantiate profits to borrow money.


Good record-keeping for tax compliance is, like most things tax-related, proactive. First and foremost, it is contemporaneous. It is not cobbled together at the end of the year, or worse when a problem occurs (e.g., an audit letter). Contemporaneous, however, can have different meanings depending on the size and type of the business. For example, busy realtors should keep their mileage logs daily. Even trying to reconstruct them at the end of the week may prove too cumbersome.  For small business owners in less mileage-intensive industries, a weekly or monthly recap of business trips may be perfectly fine.


Understanding the different types of business records necessary for tax compliance is important. In general, these records can be classified into the following four categories:

1 – Documents that Substantiate Income – —In general, all income is taxable unless it isn’t. In other words, unless there exists a specific exception in the code that excludes it, all items of income are taxable. Some items that aren’t income that accountants commonly see included in client books and records as income are borrowed money, money gifted to help you start your business that does not represent an actual investment in the business, and the owner’s own cash contributions to the business. Keep the following documents for three years after the return is filed: 

  • Bank and broker Forms 1099 to support interest and dividend income
  • Loan paperwork, signed receipts, check copies, and other documents to support cash deposits that are not income, but might look like income when looking exclusively at bank deposits
  • Invoices and sales receipts to support gross sales revenue.

2 – Documents that Substantiate Deductions— Many clients often, and wrongly, think that simply paying an expense from a business account magically converts it to a business expense. Deductions are allowed for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”  Certain business deductions (e.g, travel expenses, meals, and mileage) are subject to heightened substantiation rules.  But all business deductions should show The amount of the deduction, the date of the deduction and the business purpose of the deduction.  Here is a list of some common items to keep:

  • Lender Forms 1098 to substantiate interest paid on mortgaged real property 
  • Credit card statements showing end-of-year interest paid on business-use-only credit cards 
  • Loan or other statements showing business interest paid on loans for tangible personal property or lines of credit from creditors or vendors
  • Receipts showing the amount of the payment, the date of the payment, and the business purpose of the payment for all business expenses
  • Mileage logs showing the date of the trip, the mileage, and the business purpose of the trip for each vehicle used in the business. Mileage logs should include business use trips as well as other personal use in order to determine the business use percentage for the vehicle.

3 – Documents Related to Assets and Liabilities—As mentioned above, booking and reporting loan proceeds as income is a common mistake. You should keep loan documents to help substantiate deposits from loan proceeds. As a best practice loan proceeds should not be deposited on the same deposit ticket as sales revenue. Loan documents, amortization schedules, and end-of-year payment statements should also be kept for three years to substantiate the amount of business interest paid for a given tax year, unless the loan is related to the purchase of a specific asset, in which case keep reading.  

4 – Documents That Substantiate Ownership Interests—These documents should be kept for at least three years after a given shareholder or partner’s interest is terminated. The documents should clearly show what was given in exchange for the partnership interest or shares (money, property, etc.) and the shareholder or partner’s basis as well as the fair market value of the property contributed. The documents should also clearly state what was received in terms of shares or percentage interest in exchange for the contribution.


While this article focuses on record keeping for income tax compliance, the general principles apply to other tax and administrative compliance as well. You should be made aware of their various state requirements and other administrative compliance requirements that apply to the business entity type. Additional tax records could include sales or gross receipts tax, excise taxes, and payroll taxes. Administrative compliance requirements could include payroll documents such as Forms W4 and I9, corporate minutes and annual report filings, safety compliance documents, etc.


Stay current on the latest tax and accounting news by inviting My Fiscal Office into your inbox with our free monthly newsletter. Click here to sign up –




My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Elite digital badge image
QBO Cert Badge

Leave a Reply